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Going Beyond The Markets In 2024

Acquiring knowledge on how to master the markets whether it’s a bull or bear™ is paramount whether you’re an experienced investor or investing with an advisor / wealth manager. To protect your wealth, amplify your impact and create generational legacies, understand what shifts may be necessary to secure a stronger strategic asset allocation personalized for your unique needs.

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“The more knowledge you acquire on protecting your wealth, the easier access you have to amplify your impact, even if you work with an advisor.” 

– The Visionary Investor Team

Figure 1: U.S. stock market, warnings and recessions, 1962-2023

Source: Monthly S&P 500 returns from 1962-2023, First neg. spread warning shown as inverted yield curve using 10 year Treasury minus 3 month T-Bill (Federal Reserve Bank of St. Louis), recessions denoted by shaded grey area (National Bureau of Economic Research 2023), research and chart by The Visionary Investor

Take control of your wealth even if someone you trust is managing it for you. Learning the key elements of portfolio optimization and inevitable market cycles will allow you to lead conversations with your advisor on how to best protect your wealth. History of the past 8 U.S. Recessions dating back to the 1960s, illustrates a stronger need for informed strategic asset allocation.

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Why Study Past Recessions in 2024?

On average, during the 8 recessions dating back to 1969, the overall stock market (viewed as the S&P 500) has decreased 23.8% from the start of the recession to its low point on a monthly basis. While these 8 economic downturns have been unique, they share similar patterns often overlooked by many professionals, advisors and wealth managers. To protect your wealth, I encourage you to explore these insights further.

Figure 2: Decline during past 8 recessions in overall U.S. stock market (%), 1969-2023

Source: Monthly S&P 500 returns from 1969-2020, decline based on S&P 500 closing price from recession start to low point during recession on monthly basis, recession year start date retrieved from NBER (National Bureau of Economic Research 2023), research and chart by The Visionary Investor

Key insights

 

Selecting Quality Assets

Principle #1: Invest in strong assets that suit your goals, no matter if that is through mutual funds, index funds, individual stocks, bonds, alternative investments or a combination of these.

Owning hundreds of companies through different mutual funds, index funds and other alternative investments often doesn’t protect your wealth but rather deviates your portfolio toward average or below-average returns in my opinion.

Understanding the historical return distribution of your investments guides your strategic asset asset selection and ability to more accurately predict future risk. MSFT’s monthly returns over the past 5 years illustrates a near perfect normal return distribution (Figure 3) while TSLA’s monthly returns over the same period has a more peaked distribution (leptokurtic) and is positively skewed (Figure 5). As a result, TSLA’s stock has shown immense upside and downside volatility, especially compared to MSFT and AAPL (Figure 4). Further, there were 19 different months in the past 5 years that TSLA’s monthly return was between -7% and -24%. 

Combining return distributions with other fundamental qualitative and quantitative analysis, such as management and financial statement research, on each of your investments gives you the knowledge to mitigate unnecessary risks. If you’re working with an advisor, always ask to see their research and methodologies on how these investments were selected and are best suited for your goals.

 

Figures 3-5: Monthly Return Distribution, October 2018-2023

MSFT monthly return distributions, October 2018-2023
Monthly return distributions of MSFT, AAPL and TSLA, October 2018-2023

Source for Figures 3-5: 5 year historical monthly returns from October 2018-2023, Kurtosis of 3.0 is a normal bell curve (mesokurtic) in this research, research and charts by The Visionary Investor from PYW Diversification Template

Going Beyond the Markets – Economic Landscape

Principle #2: Acquire knowledge into economic landscapes beyond the markets. Macroeconomics impacts your investments even when the asset’s fundamentals are strong.

Many investors don’t know when we are near or in a recession. Looking at key economic indicators that NBER (National Bureau of Economic Research 2022) uses to determine business cycles, such as real personal consumption expenditures, real personal income and all employees, can help you better prepare and predict where we are in a cycle.

Learning economic cycles helps investors make more informed decisions to protect their wealth. Reinvesting in quality assets during economic downturns can provide an immense opportunity for you to create generational legacies in my opinion.

“You can’t time the market perfectly, but better timing certainly exists through knowledge of economic landscapes.” – Andrew Marks

 

Table 1: Past 8 U.S. Business cycles, 1969-2020

Source: NBER, US Business Cycle Expansions and Contractions (National Bureau of Economic Research 2023), table by The Visionary Investor

Strategic Asset Allocation

Principle #3: The weights of each asset in your portfolio has one of the largest impacts on your wealth.

Volatility is expected during market cycles but may be able to be managed by choosing assets that have historically shown low or negative correlations and strong projected returns.

Pairing quality assets, with a strong understanding of the current economic landscape and strategic asset allocation is paramount for your wealth. You can accomplish this by securing an optimal diversified stock portfolio with just 3-7 strong individual large cap stocks in different sectors proven by historical data, and is possible in my opinion.

Figure 6 shows the correlations of negative returns on a monthly basis of 4 stocks, Costco Wholesale Corp (COST), Apple Inc. (AAPL), Deere & Co (DE) and Eli Lilly & Co (LLY). The average correlation of negative returns was -0.113. In other words, this showed that these 4 stocks were considered slightly negatively correlated over this 5 year time period (meaning that overall their monthly returns moved slightly in different directions or were relatively unrelated to one another). By performing research and predicting risk and return levels, one can try to determine the likelihood of this happening again.

To be able to plug in your assets to see their correlations more easily, send us an email to discuss how to access our PYW Diversification Template.

 

Figure 6: Correlations of negative returns, October 2018-2023

Source: 5 year historical monthly stock returns from October 2018-2023, research and chart by The Visionary Investor

Appendix

Federal Reserve Bank of St. Louis. “Federal Reserve Economic Data.” FRED.

National Bureau of Economic Research. 2022. “Business Cycle Dating Procedure: Frequently Asked Questions.” NBER. August 15.

National Bureau of Economic Research. 2023. “US Business Cycle Expansions and Contractions.” NBER. March 14.

 

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Whether It’s a Bull or Bear™

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